Construction Intelligence Report: KSA Update

Oil prices have steadied in the $50-$55/barrel range following broad compliance with the first round of OPEC production cuts.

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With the potential for further cuts on the horizon, a range of $50-$60/barrel for 2017 is largely viewed as probable. Because of these ongoing issues, KSA is looking to rebalance its budget deficit by 2020, with further government spending reviews undertaken to achieve this and various funding and bond options examined.

Some positive signs are returning to sections of the industry following the recent award and mobilisation of the National Programme Management Office (NPMO). It is also expected that 2017 will see the award of numerous government level Project Management Offices (PMOs). The historical stalling of awards has severely impacted the construction industry, so although these PMOs will take time to implement, the path forward is encouraging.

This is supported by the declaration from the Deputy Crown Prince that there will be tangible Government sector awards late in 2017, and our forecasts for awards for the year therefore remain at $27Bn.

As a post Brexit UK continues to look for new trading opportunities, the potential to increase Export Credit Agency (ECA) funding to the region could also benefit the construction sector. Increased UK (and to a certain extent, EU) ECA activity in both the public and private sector for feasible projects will allow some schemes to move forward. The private sector, if funded, is now looking to take advantage of current tendering levels and this should trigger further demand.

Alternative financing solutions such as Independent Water & Power Projects (IWPP) and Public Private Partnerships (PPP) are firmly on the agenda and the first quarter has seen some significant tenders on this basis. They includes IWPP's and PPP for General Authority for Civil Aviation (GACA) for 3 key airports - Hail & Al-Qassim, as well as PPP tender submissions for Taif airport. This bodes well for the short term as the industry hunts for positivity and work. This trend is expected to increase, although with some caution as over exposure to alternative finance can cause long term fiscal issues.

The alteration in tax rates for Saudi Aramco and the assignment of an advisory bank for the upcoming Initial Public Offering (IPO) should give the industry cause for mid-term relief. The monetisation of the organisation will enable the Government to commence further investment in the country's infrastructure needs, which will progressively help the industry returns to growth.

There is cautionary note around the issue of further bonds into the market. If the National Transformation Programme and Vision 2030 fails to deliver the quantum of change that the financial markets would expect, the refinancing charges on maturing bonds could be significant and the interest rates may well rise dramatically. This, in the mid-term, could impact the Government's balance sheet. The return of larger quantities of liquidity to the markets over the later part of this year and through next, will aid the industry in financing schemes.

Our construction inflation forecasts remain unchanged from the previous quarter. Pricing remains under sustained pressure as the malaise in tendering and awards across the GCC in Q1 was reflected in the Kingdom. With Ramadan and the summer months fast approaching, a return to growth may be delayed to Q3 and Q4. We expect inflation to be flat or slightly negative in H1, with recovery in H2 caused by the VAT introduction and the flow through of construction material increases start to come through the supply chain.

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